Where next for financial services regulation in the UK?

October 2022

The financial services regulatory sector is about to enter a period of profound change. With multiple priorities in play, what might this mean for regulators and the sector?

In recent weeks we have seen how central supporting the international competitiveness of the UK’s financial services sector is to the Government’s agenda. In The Growth Plan 2022 the Government announced it would be launching an ‘ambitious deregulatory agenda’ in the Autumn. With the Financial Services and Markets Bill (FSMB) already proceeding through Parliament, the UK’s regulatory framework is entering a period of change. But what will this mean in practice?

I think there are a few key areas to watch. The first is how the institutional framework for making regulation in the UK evolves, including the relationship between the Government and the regulators. The second is the pace and extent of the Government’s deregulatory agenda and the impact it has on existing regulatory priorities. In each of these areas there is a difficult balance to strike.

Entering a new phase

The FSMB will set the UK’s post-Brexit institutional framework for making regulation. Regulators will be granted additional rule-making powers in a range of areas. It will also respond to a number of other priorities, such as technological change in the sector, as well as taking a number of other regulatory initiatives forward. The FSMB proposes to introduce an ‘intervention power’ for HMT to overrule the regulators where it is justified by the ‘public interest’. The circumstances in which the power can be used are yet to be determined, but the introduction of it is likely to reignite the debate on regulatory independence.

The FSMB will give the regulators very extensive new powers, which have the potential to have a significant impact on one of the UK’s most important sectors and the economy as a whole. So it is unsurprising the Government wants to retain some level of control. However, regulatory independence from political interference is an important component of the UK’s success as a financial centre, and the sector is unlikely to favour regulators who are at risk of being constantly second guessed. This means a very clear framing of when the intervention power can be used will be extremely important.

The FSMB will also provide the regulators with a secondary objective for international growth and competitiveness. What might the regulators do differently in the future because of this new objective? The regulators have made clear that they are, unsurprisingly, not in favour of a deregulatory race to the bottom. They see a robust regulatory framework as something which will support the success of the UK as a financial centre, something I expect the majority of financial services firms in the UK would likely agree with. But both the PRA and FCA say they see scope to be more accountable and responsive to developments in the market, for example technological innovation. They also see scope to remove regulatory burdens where doing so is balanced with protecting financial stability, market integrity and consumer protection.

Balancing a number of priorities

So where to strike the right balance between these different priorities? In some areas the focus on competition, competitiveness and growth is already influencing decisions. The government and regulators are planning or have made changes to a number of areas of regulation, including the bonus cap, the strong and simple prudential framework for smaller banks, the listings regime, Solvency II and MiFID. There is likely to be an ongoing debate on where the reforms to Solvency II and the strong and simple regime land, but where else might the deregulatory focus fall? At the most recent debate in Parliament on the FSMB, relaxing or even completely removing the ring fencing regime for large banks was suggested, as was reform to the PRIIPs regulation. The FCA has also indicated it will be looking at the requirements placed on financial advisers to make them more proportionate, with the aim of making financial advice more widely available.

All of these ideas may merit consideration. However, there is a limit to the amount of regulatory change the sector and regulators can deal with in a short period of time, particularly when there are so many other challenges to deal with. Prioritising those measures which will have the greatest effect will be important. The Retained EU Law (Revocation and Repeal) Bill includes a sunset clause to remove retained EU law from UK legislation by 31 December 2023, with the potential to extend to 2026 in specific cases. In the context of financial services this represents reviewing and potentially amending thousands of pages of onshored EU regulation before consulting on these changes and bringing them into the regulators’ rule books. This will be an enormous task. Doing so by the end of next year would represent a huge burden on the regulators and sector, and would squeeze capacity from other more productive areas. So I expect financial services might be an area where the Government uses the extra time available.

International standards and the international standing of the UK will also be important considerations in any deregulatory drive. Much of the UK’s regulatory framework derives from internationally agreed standards and the view internationally that the UK has a robust regulatory framework supports the ability of UK firms to operate internationally and for international firms to operate in the UK. Additionally as a global financial centre many of the largest financial services firms in the UK operate in multiple jurisdictions and seek the greatest degree of international consistency in regulation as possible.

Don't forget the benefits

There is no denying that ill designed regulation acts as a drag on innovation and growth. But well designed regulation can bring significant benefits, not just in terms of financial stability or consumer protection, but also in encouraging the development of markets and innovation. Regulation can provide a framework to boost competitiveness. For example clear and internationally consistent sustainability disclosure requirements can support the development of green markets. Proportionate and well designed regulation can give firms the certainty they need to deploy new technologies such as AI, machine learning and distributed ledger technology. The UK regulators have made great progress in a number of these areas and are, rightly, respected internationally. For the regulatory framework to support the sector it will be important that these topics continue to receive the attention they deserve, as well as other perhaps less high profile priorities such as making supervisory and authorisation processes more efficient and easier to navigate.

At a crossroads

It is welcome that the Government sees financial services as a priority. The sector makes a huge contribution to the economy and the regulatory framework has an important role to play in supporting the sector's role in driving economic growth and innovation. So it is right that the Government and regulators seek to ensure, now they are able to, that the UK’s regulatory framework supports the sector. Equally important though will be to recognise that there is no regulatory lever which the Government can pull which will automatically shift the fundamental competitiveness of the sector. There are many other factors in addition to regulation which will determine this, including market access, skills and tax. The UK’s regulatory framework is entering the most important phase of development since the global financial crisis and now, more than ever there are multiple priorities for the sector, regulators and Government to balance.